Working Paper
The Dynamics of Innovation in the Wireless Telecom Industry during two Eras of Technological Convergence, 1995-2015
This project has received funding from the European Union Horizon 2020 Research and Innovation action under grant agreement No 649186
INNOVATION-FUELLED, SUSTAINABLE, INCLUSIVE GROWTH
Henrik GlimstedtStockholm School of Economics
09/2017 May
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THE DYNAMICS OF INNOVATION IN
THE WIRELESS TELECOM INDUSTRY DURING
TWO ERAS OF TECHNOLOGICAL CONVERGENCE, 1995-2015
Henrik Glimstedt
Stockholm School of Economics
May 22, 2017
This project has received funding from the European Union Horizon 2020
Research and Innovation action under grant agreement No 649186
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ABSTRACT
This paper traces the changing dynamics and strategies of innovation in
wireless infrastructure industry, covering three major phases: (1) massive
adaptation of wireless services in the 1990s and the Internet Cries, (2) the
smartphone revolution and the trends to commoditization of wireless systems and
(3) search for new profitable growth in services, cloud and Internet-of-Things. It
analyses the development of the specific industry character: role of open industry
standards as pathways for innovation, the continuous leadership of vertically
integrated incumbent system integrating vendors, the regionalization of
communication markets, and the development of telecom regulations. It shows
how the equipment industry’s continuous massive R&D efforts (i.e. 3G, HSPA,
HSPA+ and 4G wireless systems) enabled the smartphone revolution, whilst the
intensive competition among wireless operators trickled down to the incumbent
equipment vendors in terms of a lethal mix of requirements for high-performing
equipment and very competitive pricing, a combination which undermined
vendor’s margins. In the process, industry incumbents shared new generations of
technologies with new innovative Asian entrants through the open standards
regime, leading to more global and heated competition. As the competition
developed from “regionalized and moderate” to “globalized and intensive”, both
European incumbents and Asian entrants explored services and software as new
areas of profitable growth. In particular, the paper analyses how the industry
players, in stiff competition with the ‘IT giants’ and platform leaders of the
Internet economy, are seeking leadership in cloud and Internet-of-Things through
the launch of the 5th Generation wireless services, to be standardized in 2020. To
explain the competitive outcomes in the different periods outlined above we need to
link two levels of the analysis:
• Firm Level Sources of Competitiveness
o Strategic commitments and business models
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o Governance of internal resource allocation and the social
organizational integration of knowledge, capabilities and resources
within the company, as well as with external suppliers and partners
o Financial resource commitments
• Standards and the Industry Architecture
o Governance of wireless standard setting processes, regional and
global
o Governance of and business models for knowledge integration of
evolving technologies within generations of standards
o Short-term and long-term impact of industry architecture on firm-
level performance
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Introduction
On February 22nd 2016, Hans Vestberg, then the CEO of Ericsson entered the
stage at the annual World Mobile Congress in Barcelona. In his keynote address,
“Partnership for Innovation”, Vestberg focused on how collaboration and new
ways of working spurs innovation and creates new solutions, especially
partnerships between Ericsson and the two tech giants Cisco and Amazon should
foster innovation-based growth. In his presentation, Vestberg stressed that the
partnership would add further muscularity to Ericsson’s far-reaching ambitions
to become a leader not only in the 5th Generation. In turn, this would strengthen
Ericsson in its role as integrator of other rapidly advancing IT-technologies, such
as cloud computing and sensors, into what the industry calls the Internet-of-
Things (IoT from hereon).1 Few could question Ericsson’s role as one of the long-
term sponsors of the visions of the connected society. It was one three leading
competitors, sponsoring the long-term evolution of mobile broadband technology,
Under the bold heading of 50 Billion Connected Devices, the company have
persistently advocated a strategy for connecting machines into wireless networks.
The hype around IoT at did not surprise the people that continuously watch
and discuss the evolution of the mobile telecom business. The buzz surrounding
IoT connects to a bigger drama that now impact and shape the wireless telecom
sector globally. To get a glimpse of these current affairs, we need to appreciate
the real impact of the smartphone revolution on today’s telecommunications
sector. Whilst the vision of digital wireless services included the notion of
wireless data and internet access from the mid-1990s, it was the introduction of
smartphone that unlocked promise of 3G mobile networks. According to research
by the international wireless industry association, the average adoption rate for
developed markets of 84% is approaching saturation whereas the number of
1 As the CEO one of the three undisputed world leaders in mobile communications systems,
this was far from Vestberg’s first address at the WMC. His presentation would however become
his last one in this capacity as the CEO of Ericsson. About nine months later, he was asked by
Ericsson’s chairman of the board of directors to step down. There were issues regarding
Vestberg’s generous compensation package, the lackluster performance of the stock and the
company’s future competitive position against its competitors. Whilst the disappointing trends in
revenues and profit margins in the current 4G markets clearly undermined Vestberg, the board
was also concerned about his ability to chart a course and drive execution for revitalization of
Ericsson in the next generation of communication technologies.
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users still are growing at higher pace in Asia, Latin America and Africa (GSMA
2017, 12). Smartphone adoption is accelerating across the developing world; there
were 3.8 billion smartphone connections at the end of 2016, accounting for more
than half of total connections (excluding M2M) worldwide. Adoption rates have
reached 65% of the connected base in developed markets. Smartphone
connections in the developing world reached 47% of the total connections base by
the end of 2016, largely due to growth in Asia Pacific and Latin America (GSMA
2017, 12). In Sub-Saharan Africa, the take-off is imminent. Market research for
Nigeria, for example, indicates that over 80% of all internet users rely on
smartphones as their sole on-ramp for access to the Internet (Ericsson 2015b, 7).
The growing number of smartphones and other advanced devices drive the
increasing the use of ‘data intensive’ applications, particularly video streaming,
on mobile networks. This has amounted to an explosion of data traffic. The
growing number of smartphones and other advanced devices (e.g. tablets) are
increasing the use of data-intensive applications, such as video streaming, on
mobile networks. Cisco (2017) estimates that smartphones generate massive
amount of data traffic compared to feature phones2. The increasing use of mobile
broadband-enabled smartphones will generate an explosion of data traffic, with
volumes forecast to grow at a CAGR of 57% to 2019, an almost tenfold increase,
with volumes to grow at a rate of ca 50% over the next five years – a more than
seven-fold increase – approaching 40 EB per month by 2020. This is equivalent to
a global average of 7 GB per subscriber per month (GSMA 2015, 14f)
One the smartphone technology diffused, mobile network operators invested
continuously in infrastructure to update their network and deploy new
technologies. To meet demand for mobile data, furthermore, operators stepped up
their investment plans, particularly by adding more capacity to the mobile
networks. The mobile CAPEX is a good indicator of the level of investment
performed by mobile operators. One the one hand, operators have rolled out more
3G/HSPA equipment as a short term solution. By doing so, their networks can
accommodate more data traffic without reducing the cost efficiency of the
2 In 2016, the typical smartphone generated 48 times more mobile data traffic (1,614 MB
per month) than the typical basic-feature cell phone (which generated only 33 MB per month of
mobile data traffic. (Cisco 2017)
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networks. Operators have also moved onto the next technological stage by rolling
out cost-effective network equipment. New network technology generations such
as HSPA+ or LTE, that is 3.5G and 4G, more than halve the cost per gigabyte
with their increased capacity per site, still relieving network capacity
constraints.3 According to a report by IDATE, the consultancy, there has been a
pattern of uneven development. Generally, the most recent technologies were
deployed most broadly in the North American, Japan and South Korean markets.
In those markets, LTE deployment reached between 70 and 95%. In the large
European markets, i.e. UK, Germany, Italy and France, CAPEX investments
have, however, been almost flat over the past few years in Europe. One direct
consequence of the lack of investment has delayed the LTE take-off (IDATE 2015,
7).4
As the smartphone became widely used across large parts of the populations
throughout the world, the sheer growth of demand for wireless services has been
stunning, However, the financial well-being of mobile operators are suffering
from the widening disconnect between the demand-side developments, that is the
market penetration of data intensive smartphones, and the revenues that
operators can command on the supply-side. While most operators are managing
to grow their top line with mobile data, there is a treacherous undercurrent. The
usual economies of scale, it seems, malfunctions in the following way: mobile data
ARPUs are not delivering the same financial margins as voice (which relies on
quality service [latency] rather than high bandwidth as for data transfer). A
significant share of smartphone customers became unprofitable because mobile
data offers are mainly structured around bundled, flat-fee plans. Operators were
lacking, under the current bundled business model, capabilities to transform
increasing demand into revenues and profits. The increasing data traffic per user
3 HSPA+ and LTE are expected to support three to five times as much traffic as HSPA (7.2
MBit/s) with the same spectrum, reducing cost per gigabyte by 40 to 70 percent compared with
the currently implemented network (Grijpink et al, 2016, 23). 4 As also noted by IDATE Consulting (2016), the contrast between EU5 and other regions is
even more striking when taking into account the respective size of the markets. CAPEX per
population (pop) ratios display the amount of money spent per inhabitant (EUR/inhabitant).
CAPEX per pop ratios are much higher in Asian countries and in the USA than in EU5. It is the
highest in Japan with more than 100€ per pop per year, whereas the USA and South Korea are
respectively at EUR 80 and EUR 60 per pop per year. Europe again falls behind with a widening
gap towards the USA during the 2008-2014 period of time at less than EUR 40 per pop in 2014.
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has not matched the ARPU, the average revenue per user. Since 2010, this
disconnect has developed into global problem, although it is most pronounced in
the European market: “Although the emerging mobile data arena will prove to be
a sizeable growth engine for most telecom operators…”, McKinsey reported, “…
preserving its long-run profitability could become a significant challenge and
priority for operators.” (McKinsey 2012, 3)”
For the period between 2006 and 2014, research by Research Center on
Regulations in Europe shows, the average price tariffs in the OECD countries
steadily declined with around 50% for the period, or almost 2.2% per quarter
(Genakos, Valletti, and Verboven 2015, 14). Operators in countries with a low
degree of market concentrations reduced tariff prices at a somewhat higher pace
than in in countries typified by competition between many smaller operators
(Genakos, Valletti, and Verboven 2015, 16) . Adding to this toxic situation, top-
line growth slowed down around in 2014. Western Europe, according to Ovum, an
London-based market intelligence group, expects see very limited revenue growth
in the period between 2016 and 2018. By 2019, Western Europe will experience
revenue decline also in real terms. For all other regions, revenue CARGs will be
modest, or around 2%. Central and Southern Asia and Africa is predicted to grow
faster than average, at of 5.1%, 4.5%, and 3.6%, respectively, through 2019
(Ovum 2015, 11). At the heart of this un-development is the increasing cut-throat
competition on data plans for smartphones, which on average is 50% lower in
Europe compared to other developed markets .
With shrinking market cap and average return on capital employed for
major European operators, such as Vodafone (UK), Organge (Fr) and Telefonica
(Sp), telecom CEOs began to look consolidation through M&A. In 2012 and 2013,
European authorities gave the green light to minor attempts to consolidate in
smaller regional markets but also a more significant merger, i.e. Telefónica’s
2014 takeover of E-Plus in Germany, which stimulated a slew of merger
proposals. European competition authorities however struggles to strike a
balance between protecting the regional operator’s business while also protecting
their customers. In 2016, Brussels for example decided to block the much-
anticipated merger of O2 and the UK branch of Hutchison’s Three. As
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emphasized of independent industry analysts, FT reports, the collapse of the deal
leaves both operators in a precarious situation (Financial Times, May 11, 2016).
This is an unsustainable situation that threatens both the long-term health of
the telecoms industry.
Trickling down of cost-pressure to wireless infrastructure equipment vendors
No other group of actors in the mobile communication industry, most observers
agree, feels the operator’s dire situation more deeply and profoundly than the
four leading full-service manufacturers of mobile systems – Huawei, Ericsson,
NSN, ZTE and Samsung. To meet operator’s seemingly endless demand for
capacity Since the coming the second generation digital services 1990s,
equipment vendors have engaged in continuous innovation in new generations of
radio access technology and core system products to meet the operator’s
seemingly endless needs for high capacity at constantly lower costs. Yet, the
development of operating margins in key product areas, such as radio base
stations, suggests that wireless connectivity has been put on a trajectory towards
commoditization in a maturing market.
Network capacity expanded primarily through innovation. Between 2006
and 2015, the R&D investments by Huawei, Ericsson, Qualcomm and their peers
in evolved and new generations of wireless infrastructure technologies resulted in
major increases in network efficiencies. Especially new network and spectrum
technologies such as 3G HSPA+ and 4G LTE technologies opened up large
amounts of capacity to the operators. The equipment vendor’ brought those
innovative were brought to the market at high cost. Ericsson, which is most
heavily specialized in wireless equipment, is a case in point. With 1/3 of the
workforce (or 21,400 employees) in research, Ericsson’s R&D spending 2012 at
32.8 billion kronor ($4.9 billion), and accounted for 14.4 percent of the Stockholm-
based supplier’s sales. On average, Ericsson R&D/sales ratio amounted to 15% of
its revenues on R&D between 2006 and 2015. In real terms, R&D expenses have
increased from 27bn in 2007 to 36bn SEK in 2015 (Ericsson 2015a). Huawei has
consistently increased the proportion of funds invested in R&D relative to
turnover. R&D/Sales ratio for Huawei --where almost half of its workforce is in
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R&D-- was 13.7 percent in 2012. Since 2013, the Chinese vendor reports that
R&D spending growth at a higher pace than its revenues. These levels are typical
to the industry. On average, the industry leaders --Huawei, NSN Networks
(Nokia-Siemens-Alcatel-Lucent) and Ericsson-- allocated on average 14,6% of
their annual incomes to R&D between 2011 and 2014. The average combined
R&D-spending by the leading equipment vendors 2011-2014 reached $57,7bn in
total. In broad strokes, the equipment vendors have to different degrees focused
their R&D-efforts in four areas:
• spectrum efficiency and radio access/antenna technologies,
• IP systems (i.e. core/edge routers and Ethernet switches),
• network virtualization, data center technology and software defined
architecture (i.e. decoupling of network hardware, functions and
control
• signal processing technologies (i.e. software algorithms and ASIC
architecture).
Despite the R&D intensiveness, the equipment vendors increasingly experienced
a profit squeeze. Particularly in the European wireless markets, operators began
to take full advantage of the rivalry between incumbent equipment vendors and
low-cost entrants (i.e. Huawei). The unusual combination of high R&D-cost and
falling revenues naturally undermined the financial results of the equipment
vendors. Huawei, the tremendously successful company that gobbled up markets
shares with promptness for the decade in all parts of the global market except in
the US between 2006 and 2016, experienced the benefits of double-digit growth.
Still, the operating margin has remained below 15% between 2012 and 2015. In
the same period, Ericsson posted operating margins between 6 and 8%, with a
jump up to 12% in 2016 due to aggressive cost-cutting (through implementation
of the Profit Plus initiative). For the sector, the combined operating margin
averaged at 7,3% between 2009 and 2015 (Xerfi Global 2016, 58).
What thus typifies the vendor sector is commoditization of wireless
connectivity and the high pressure on R&D to deliver spectacular technological
advances. Without these cost-saving innovations, the demand from today’s data
hungry end-consumers would not have been possible to meet neither
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economically nor in technical terms. Research by independent analysts, such as
Analysys Mason (2013) and Booze Allen (2013), shows that, for investments in
latest LTE equipment, the ToC per unit of network capacity has decreased with
no less than 95% compared to investments in 2.5 or early 3G technologies.
Published reports by Telenor points in the same direction: the operators are
increasingly getting a ‘bigger bang for the buck’.
Diagram 1: Figure 1: Development of Network Spending per Gigabyte, 2009-2015
Adopted from: (Spilling 2016)5
Peter Laurin, senior vice president and head of Ericsson’s global sales to
Vodafone, confirmed in an interview with the author that network cost efficiency
have increased between one hundred and two hundred times between 2006 and
2016, depending on site utilization (Larurin 2016). Even if being great news for
the customer, who enjoys the benefit of dirt-cheap data plans, it is however a far
more troublesome development for the equipment vendors. For each invested
Euro in R&D –it seems-- the financial returns to innovation shrinks even further.
Internet-of-Things: the Light in the Tunnel
So, here we are at a juncture in the evolution of the mobile communication
business where means and ends do not quite match -- at least not for equipment
manufacturers. No wonder that Ericsson and its peers spent so much time on IoT
at the MWC. As the stakes got higher, the participants of the MWC were not only
looking for answers concerning how big the pie will be, but also what companies
5 Telenor presentation by Rolv Olof Spilling, CTO, https://www.telenor.com/wp-
content/uploads/2012/03/cmd10-02-2-rolv-erik-spilling-modernisation-of-the-mobile-network.pdf
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will lead the way into the profitable business models. While previous generations
of mobility solutions were put to the market by a closely knit group of incumbent
players – wireless system vendors, phone manufacturers and the mobile
operators – IoT involved a much broader range of software and hardware
companies from all corners of the world of information and communication
technologies. To the companies that dominated wireless connectivity industry
(e.g. Vodafone, Ericsson and Huawei) the prospect of IoT meant that their
incumbent positions were challenged by all types of companies that lead in the
now converging sectors (e.g. IBM, General Electrics, Accenture, Amazon, Cisco,
Google, Oracle or Apple to round up some of the usual suspects). They were all
asking the same questions: which position in the IoT value chain will capture
most of the value; who will lead and become the incumbent dominator of the IoT?
Therefore, many executives that addressed the 2016 WMC put heavy emphasis
on new partnerships just like Vestberg did. Executives were trying to draw the
attention to the emergence of new technologically capable combinations of
companies (under their direction) that together would provide ‘industry
leadership’ into the technological convergence that now was called IoT. In other
words: the new visions technological convergence have triggered a tendency
towards attempts to create partnerships for market domination.
Convergence -- a deja-vu
For people with long experience of the communication technology and services
sector, there is something peculiar about current events. Particularly term
convergence has a familiar ring. In the 1990’s and in the years around the new
Millennium, operators and vendors alike used the term to flag for a series of
technological shifts, or ‘generations of technologies’ in the wireless
communication business that would integrate voice, data and entertainment
services.
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Table 1: Mobile Services: 1G-5G
Generation Target Customer Primary Service Differentiation Weakness
1G Wealthy people and
corporate
Voice Mobility Poor spectral
efficiency; major
security issues
2G B2C; broader consumer
segments
Voice + SMS Secure mass-
adoption
Data limited to
SMS
2.5 See above Voice + SMS +
WAP
First attempt at
data
Very limited data
rates
3G See above Limited broadband Better Internet
experience
Performance
failure, too much
hype
3G HPDA See above Wireless
Broadband
True Internet
browsing
Still too tied to
legacy architecture
and protocols, but
4G See above All-IP Fast broadband,
cost-reduction
5G B2B services; IoT All-IP Fast, low latency
Source: GSMA, 2016
Few, if any, industries has so systematically linked the concept of generations of
innovative technologies in the marketing of equipment and services as the
wireless telecom operators and the wireless equipment vendors.
The transition from 3G to 4G services has offered users access to considerably
faster data speeds and lower latency rates, and therefore the way that people
access and use the internet on mobile devices continues to change dramatically.
Across the world operators are typically reporting that 4G customers consume
around double the monthly amount of data of non-4G users, and in some cases
three times as much. An increased level of video streaming by customers on 4G
networks is often cited by operators as a major contributing factor to this. The
Internet of Things (IoT) has also been discussed as a key differentiator for 4G,
but in reality the challenge of providing low power, low frequency networks to
meet the demand for widespread M2M deployment is not specific to 4G or indeed
5G.
Re-regulations and privatizations: paving the way for new generations
Throughout the European Union countries, the regulatory framework of the
telecommunications industry changed radically during the 1980s and l990. In
particular, the vision of a common integrated wireless telecommunications
market was at the center of these developments. Already in the 1980s, the
process of privatization and re-regulations world transformed the emerging
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wireless sector. While national telecom authorities and their international
organization a major part, the Commission of the European Communities
believed that the implementation of a pan-European wireless service was
essential to the more general aspirations for the integrated European market
(Garrard, 129-130.). In particular, the Commission of the European Community
developed a series of policy documents – so called White Paper and Green Books
– from 1984 and the mid-1990s, broadly defining a path forward towards a
deregulated, internally harmonized, competitive and fully integrated European
market for telecommunication services6. Starting in 1988, through a step by step
approach, the EU liberalised all segments of the telecoms market: terminal
equipment, value-added services, satellite equipment and services, cable TV
networks and mobiles communications. This process culminated in 1998 with the
liberalisation of voice telephony and infrastructures. To create a unified EU-wide
telecoms market, common rules were needed for the purpose of continuous
technological integration and harmonization. This was done by the establishment
of the so-called Open Network Provision – or ONP Framework. The purpose was
to set the rules for open access to the networks of the old monopolies so that the
new entrants could offer services in competition - on equal terms - with the ex-
monopolies. Under the new set of rules, national regulators were required offer
spectrum licenses to at least three new entrants that were encouraged to compete
with the ex-monopolist operator in the provision of mobile services.
6 There is an excellent literature on the development of European telecommunications
policy and its impact on the evolution of the wireless sector. This section draws in particular on
(Garrard 1998, Glimstedt 2001, Lazer and Mayer-Schonberger 2001, Lembke 2002, Pelkmans
2001, Zysman and Schwartz 1998)
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Diagram 2: Market liberalization, OECD area, 1989-2003
Adopted from: (OECD. 2004)
In parallel, European policymakers influenced the wireless market by pressing
hard for a set of common wireless standards –GSM and UMTS—in order to
stimulate innovation as well as economies of scale in the wireless communication
sector. Harmonization of spectrum represented a necessary condition for market
integration across the different member states. New standardization agencies
were established with a mandate to open markets to competition, prevent
incumbents from abusing their position and avoid collusion between national
operators. Other actions were undertaken to liberalize the industry, including
number portability and carrier selection. In addition, progress was made towards
the privatization of state-owned operators.
Almost a full decade ahead of Europe, the de-regulation cycle in the United
States was in full swing by the mid-1980. The break-up of AT&T monopoly paved
the way for wireless operators. By the middle of the 1980s, FCC began to issue
wireless phone licenses for dedicated rural and metropolitan areas, and by the
first generations wireless operators began to deploy analog cellular wireless
systems in the United States, i.e. United/Sprint, Bell Atlantic, GTE,
AirTouch/Verizon) and Cingular/AT&T VoiceStream/T-Mobile. Beginning with
Vodafone (1986) and SFR (1989), British and French regulators issued wireless to
private wireless operators in Europe.
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Demand and Growth
Even if there were tendencies to a growing demand for cellular services in the
1980s – we all recall the mobile phones in the size of a regular brick as a symbol
for success in movies in the 80s – the inclination of people to embrace the mobile
services came as a surprise also to the most enthusiastic tech evangelists. From
the mid-1990s, demand for wireless cellular services grew also in developing
world. In China alone, the number of subscribers increased from 3.63 million in
1994 to nearly 200 million by 2002. A few years later, China Mobile surpassed
Vodafone in terms of number of subscribers.
Diagram 3: China's subscriber base, in millions
Source: ITU Database
With more than 4,7 billion unique subscribers in 2016 globally, mobile market
penetration reached 63% of the global population. In one or another way, more
than two thirds of the global population has access to mobile services (GSMA
2016).
From ‘New Economy’ to ‘Internet Crises’
In 1980s and 1990s, telecom operator executives began to worry about tendencies
in the ITC sector. One thing seemed almost certain: a technological cocktail
consisting of three ingredients --Moore’s Law, optical networking and TCP/IP—
0
100
200
300
400
500
600
700
800
900
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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would sooner or later disrupt the incumbent operator’s fixed telecommunications
business. If a phone call could be routed over the Internet instead of switched
through the operator’s networks, it would be impossible for operators to defend
the pricing. Therefore, there was a widespread agreement that “voice over IP”
would destroy the ‘closed circuit business model’. In that scenario of disruptive
innovation, wireless as added value services fitted in perfectly as a substitute for
the shrinking fixed line business.
The arrival of wireless services was timely. Customers did not just increase
in numbers; the amount of average revenue per user increased was pushed
upwards as customers both made more calls and adopted more innovative
services, e.g. SMS and pre-paid. With dramatically better growth and EBITDA-
margins around 40% for wireless operators (as in the case of Vodafone in 1999),
the business case seemed clear -- technology would pay-off sooner than later.
Financial investors flocked around the opportunity of providing wireless
telecommunication as a relatively expensive service in rapidly growing markets.
Diagram 4: Value of European Telecom Operators 1999-2003
Adopted from (Lenain and Paltridge 2003).
When the wireless industry began to push for the notion of convergence between
IP and voice services through the concept of “wireless internet” in the late 1990s,
the financial market’s expectations on the arrival of a so called new economy
triggered a financial boom telecommunications companies. Valuations of wireless
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operators increased beyond all expectations. Both financial markets and public
policy were eager to profit. When the government issued bidding for 3G-licenses
to mobile operators, the financial markets did not flinch. They were more than
eager to as they proved to be willing to pull together financial backing for the
operators multi-billion bids in the 3G-spectrum auctions between 2000 and 2002
(Binmore and Klemperer 2002, Van Damme 2002). The financial market’s
eagerness to risk big money in telecom peaked at the Millennium. In an action
the ran in March 2001, the British government raised 24 billion £ (or 34 billion $)
in what was frequently called the “biggest auction ever” (Binmore and Klemperer
2002). The 3G-auctions fetched no less than 45,9bn$ in Germany and 10,1bn$ in
Italy. Smaller countries, as Norway, offered 3G licenses for between 200 and 500
million USD. Only months after the British auction, the telecom operators would
be drawn into a sharp industry recession. For more than three years, ‘the
internet crises’ offered but long shadows over the telecommunications industry in
the period between summer of 2001 and early spring 2004. British Telecom (BT)
was a case in point: In the period of deregulation in the 1990s, BT transformed
itself from a British operator to world telecommunications provider, collaborating
in joint venture named Concert with AT&T and investing in Asia-Pacific region
to provide global reach. The Internet Crises saw a complete reversal. Concert was
dissolved, BT divested across Asia, and mobile operations in Europe were sold-
off. BT’s chairman and CEO have both resigned following the 3G disaster. As Sir
Peter Bonfield, BT’s CEO frankly admitted to the Sunday Times, London, 18
February 2001, ‘We spent £10 billion too much’.
Having rushed into financial traps laid by government in the 3G auctions,
Sir Bonfield was the only one among his peers that lost his bearings. Similar
series of events shaped the misfortunes of France Telecom, Deutsche Telecom,
Vodafone, KPN and Telefonica, which all, by 2001, carried outstanding debt.
Typically, the levels varied between $62bn (France Telecom) and $31bn (KPN).
According to the Financial Times, stock market valuations of telecommunication
companies had fallen by an average of 60 per cent by September 2001 from their
high point in year 2000. Taking into account the write-offs, bankruptcies and
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closures worldwide, “probably $1000 billion gone up in smoke” (FT, 5 September
2001).
Implications for equipment vendors in the 1990s
In optimistic 1990s, however, the financial craze proved to be ‘manna from
heaven’ for wireless equipment vendors, at least in the shorter term. With the
financial markets were eager to channel vast sums into the wireless sector and
the end-users willingness to sign up with operators at high prices per minutes,
the wireless operators were heavily induced to invest in network capacity. In
1990, operators invested CAPEX around 50 bn$ per year in network equipment.
A decade later, their combined CAPEX soared to 250 bn$ on the yearly basis.
Diagram 5: Global CAPEX in the Telecommunications sector, 1990-2011
Sources (Reynolds 2009)
According Reynolds, around 60% of those investments were directly linked to
increased wireless networking capacity. Accumulated capital investment by
telecommunication operator Verizon between 2004 and 2007 was larger than the
capital investment of major industrial companies, including GE, IBM, mega-sized
retailers like Wal-Mart, leading energy companies such as Exxon Mobile or
Conoco Phillips, automobile manufacturers such as GM and Ford and consumer
product companies such as Johnson and Johnson, in the same period (Reynolds
2009, 15).
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Standards – pathways to innovations
Due to the need for interconnectivity in communication systems, innovation in
wireless technologies is closely linked to standards and standardization
processes. The general development forward from 1G to 4G wireless broadband
services followed distinct technological paths with clear trajectories, which
defined wireless standards. For the different generations of wireless services,
European, North American and Asian standards development organizations
(SDOs) sponsored different wireless standards, which in turn were building on
different technologies and system architectures.
Figure 1: Evolution of Standards by area of origins and major sponsors
Source: Author’s analysis
When 1G analog wireless cellular emerged in Europe and Japan, it did so under
the auspices of national monopolist operators. Hence, the technological
coordination and standardization was led by the national operators, often with
assistance of their national suppliers. The objective was to serve a small niche of
the national telecom markets. In the United States, FCC commissioned to AT&T
20
to draft the standard that FVCC defined as AMPS, which was published as an
open standards and adopted also in the UK (as TACS). The Nordic operators a
similar ‘open’ approach to standardization through the joint standardization of
the NMT-system. Although critical, the market impact of analog systems were
limited: By 1990, only a handful European countries had reached above one
percent market penetration: the Nordics (between 5% and 7%), Switzerland
(2,6%), United Kingdom (2%). European policy makers, who were now about to
pave the ways for the European Single Market, pushed hard for de-regulation of
the communication sector, including a common European wireless standard
(GSM), which would enable Europe-wide wireless services. In a not always so
light-handed manner, the Commission of the European Community pulled
strings and pushed national regulators, operators and telecom equipment
manufacturers into the GSM standard in order to generate major economies
scale, lower prices and future-oriented notion of innovative wireless data
services. If pan-European powers were instrumental in shaping the politics of the
first common European wireless system, the technologies upon which the
standard was building were drawn from many different sources. GSM developed
technologically as a bottom-up process in which competing wireless vendors
contributed different technological solutions to the standard. GSM evolved as
intra-standard competition (competition within the standard), meaning that the
companies that originally designed the standard thereafter competed against
each other by offering GSM-systems (as opposed to offering systems of a different
standards as in the pre-GSM era).
In the US, the FCC favored the idea that each vendor should develop its
own standard. I would then be up to the ‘market’, that is, to operators and
individual subscribers to choose between existing standards, according to the
principle of inter-standard competition (competition between standards). This
became evident when FCC supported the standardization of IS-54 developed by
Qualcomm in parallel with D-AMPS (IS-95), which had roots in the collaboration
between AT&T and Motorola. Qualcomm also worked closely with Asian
operators, particularly with South Korea’s telecom operator and Korean hand-set
manufacturers, to expand the basis for ISA-54 into Asia.
21
Table 2: Overview of Wireless Standardization Regimes in Europe and United States
CEPT (-1988 ETSI 1988-1994 ETSI/3GPP
(1994-
United States
Market scope National European Global Global
Role of
operators
Major; direct Declining; in-
direct; also
through MoU
Limited; direct Limited, indirect
Role of
equipment
vendors
Limited; indirect Growing; direct Growing; direct Major; direct
Role of national
governments
Major, indirect
through nat
operators
Limited; indirect None Limited
Role of EU None Active; indirectly
supporting EU-
based vendors
and operators
Active; indirectly
supporting EU-
based vendors
and operators
--
Basic principle Formal standard
(by committee)
Hybrid:
Competition
within standard
Hybrid:
Competition
within standard
Market:
Competition
between
standards
Implication Government
(through the
monopoly
operator) decide
over standards
and its technical
underpinning in
national markets
EU politics
decide on a
framework for a
common
standard;
equipment
vendors and
operators agree
on technical
underpinnings
EU politics
decide on a
framework for a
common
standard;
equipment
vendors and
operators agree
on technical
underpinnings
Regulator
neutral. Any
actor can develop
and submit a
standard. The
market
(operators) are
free to choose
from competing
standards
Outcome Fragmentation
between
countries
Common
standard (GSM)
Common
standard (UMTS,
LTE)
Competition
between
standards and
fragmentation
within the US
market
Architecture Closed Open Open Closed
Sources: (Bekkers 2001, Cowhey, Aronson, and Richards 2008, Funk 1998, Funk and Methe 2001,
Garrard 1998, Glimstedt 2001, Lindmark 2002, Palmberg, Bohlin, Iversen, et al. 2006, Palmberg,
Bohlin, Saugstrup, et al. 2006, Pelkmans 2001)
With the policies that promoted integration and competition in the European
market, the battle over markets shares resulted in quality of services,
technological innovation as well as in reduced prices.
From Standard to Product Innovation
There has been a widespread celebration of the wireless equipment vendor’s
commitment to innovation in wireless broadband. While the generations of
22
wireless technologies often has been referring to the evolution of wireless air
interface technologies, that path to wireless broadband has been building on the
(far less discussed) process of integration of thousands of discrete product
developments into a new complex system of wireless technologies. Intensive long-
term research efforts and innovative productive development in areas transport
optical technologies, transport protocols, package switching, routers, ASIC-
design, software-based features from the 1980 and onwards thus provided the
basis for the different generations of mobile broadband services. Although
patents cannot be regarded seen as a particularly good indicator of research
intensity, it is worth noting that the number of essential patents tripled between
the second and third generation and quadrupled between the second and fourth
generation.
Table 3: Major innovations in radio base station technologies by generations
Analog 1G Digital 2G Digital
2.5G
Digital 3G Digital
3.5G
Digital 4G Digital 5G
Interface
Technology
FDMA TDMA GPRS
EDGE
CDMA
WCDMA HSPA
HSPA+
OFDMA
Bandwidth 2kb 64kb 144kb 2mb 4mb 1gb 10-100gb
Switching Circuit Circuit Packet PacketATM PacketATM
PacketIP
All- IP All-IP
RBS volume
(in liters
per voice
channel)
14 l/channel 8 l/channel 4/channel 2 l/channel 0,l/channel
RBS mode Single mode Single
mode
Multi-mode Multi-mode Multi-mode Multi-mode Multi-mode
Signal
processing
1M 5M 20M 20M 50M
ASIC tech 0,25um 0,13um 90-65nm 32nm
Essential
patents
(claimed)
13 853 43.658 61.833
Source: author’s analysis of Ericsson (Macro) RBS 200, RBS 3000 and RBS 6000 series
Regionalization of competition
GSM became a European success story in the 1990s, as European wireless
operator converged in their decisions to move into the digital services through the
GSM system. GSM marked the end of the fragmentation of wireless services. The
23
second generation was just a few years into deployment when its main backers in
Europe looked for a way to build on momentum created by GSM.
Diagram 6: Wireless Standard’s Market Share by Region, 1999
Source: ITU
The plan was to make Europe a powerful center of 3G, a process which would
integrate wireless voice services with more expanded “Internet-like” services.
However, the GSM-technologies were not enough scalable to support wireless
broadband services. In the mid-1990s, there were considerable efforts on
upgraded GSM services (i.e. GSM 2.5, supported by EDGE and GPRS). But most
actors within the industry would soon come to the conclusion that, if wireless
broadband should become a technological reality, they would need to shift to a
new technology. One feasible alternative technology --all parties now agreed by
the mid-1990s -- was a technology called ‘spread spectrum’ (or CDMA), which had
been developed and deployed in 2G-mode in the United States (and Korea) by
Qualcomm as IS-54. In the 1980s, CDMA spread spectrum technology was
generally held to be a superior wireless technology, but only so in theory and in
experimental sites. For real market applications, it was considered to be too
complex. Qualcomm, a San Diego-based company, however proved the sceptics
wrong by developing a set of patented technologies that solved the major issues.
24
Within Europe, the European Commission funded large-scale research programs
on different wireless broadband technologies. One group, including Siemens and
Nokia, tried to extend GSM technology by adding elements of CDMA. The other
group, led by Ericsson, focused on a ‘wideband’ version of spread spectrum
technology, later called W-CDMA.
EU thus deployed its supra-national policies to pull together Europe’s
universities, equipment vendors and other relevant actors into a coordinated
European plan for 3G. According to the European principle of competition
between of different pre-standards, a range of technology consortia were
therefore invited into the standardization process to challenge the two main
candidates. At the end of the selection process, Europe would stand united
behind one 3G-technology to be called UMTS just like it rallied around the GSM
standards for second generation in the late 1980s. After a period of trials
negotiations and a voting process between 1997 and 1999, ETSI announced its
winner: UMTS was to be based on the concept of W-CDMA pioneered by the
consortium led by Ericsson.
Equipment vendors quickly dedicated resources to the development of third
generation already when the second generation systems won market traction.
Most operators agreed with the vendors that the future wireless services would
involve some kind of extended added value ‘Internet-like’ services. Therefore,
equipment vendors competed to establish a third generation so that operators
would be locked-into a secure path of technological up-grades. If operators would
opt for UMTS as its third generation technology, the operator would be locked
into GSM for the second generation to secure full back-wards compatibility
between generations. In other words: establishing UMTS was a way of selling
second generation GSM-equipment.
The notion of the UMTS as a ‘launch pads’ for European wireless operators
and equipment vendors created debate in the United States. Particularly
Qualcomm argued that the European standardization process excluded non-
European firms from contributing to the European standardization process
whilst Europe, furthermore, infringed on Qualcomm’s vast portfolio of patents. In
1998 and 1999, this matter was bought up for negotiations between the US and
25
European Commission through an intervention by the US secretary of State.
Much like the prelude to the GSM standard, also the third generation of wireless
services attracted interest at the highest political levels involving the US
secretary of state, and high-ranking EU officials (Glimstedt, 2001).
Table 4: Inter-Standards Competitive Groupings by Wireless Standards: vendors,
operators and countries
GSM W-CDMA, LTE
CDMA, CDMA2000
TD-SCDMA WiMax
Leading
Vendors
(in 1999)
Ericsson, Alcatel, Nokia Qualcomm, Nortel,
Lucent Siemens,
Huawei, ZTE Motorola, Intel, Samsung
Flagship
Operators Vodafone, AT&T, China
Unicom Sprint, Verizon China Mobile Clairwire, Sprint
Geopolitical Europe, Japan USA, South Korea China Silicon Valley
Source: the author’s analysis
China also entered into the game. Already before China’s entry into GATT, the
Chinese government began to plan for expanding wireless services in China’s
gigantic market. One of the issues discussed among China’s leaders was the
dependence on foreign standards and the cost of foreign patent royalties. Thus
China began to review its options, as they saw a ‘battle-of-systems’ in wireless
technologies with two opposing main camps -- Qualcomm of the United States
joined by the South Korean handset manufacturers versus Europe’s UMTS with
its allied partners, including Ericsson and Nokia. The Chinese government
played two cards simultaneously: It wanted to to kick-start 2G wireless services
through making deals with both the European camp and the camp led by
Qualcomm. In addition, the government initiated research collaboration around a
new 3G-standard (TD-SCDMA) sponsored by China to be deployed by the leading
domestic operator, China Mobile, in order to reduce the dependence of
technology.
26
Incumbent and entrant firms under uncertainty
Broadly speaking, by the late 1990s there were two basic types of innovating
equipment vendors in the wireless industry. On the one hand, incumbent telecom
system vendors (such as AT&T/Lucent, Nortel, Ericsson, Siemens, Alcatel and
Nokia) were the early system integrators in 1G and 2G technologies. These firms
made the heaviest investments in R&D, spending 15-20% of the revenues on
research and product development, they developed and agreed on standards, that
is the basic system architecture design, and they captured the position of
incumbent providers of wireless telecom system to the wireless telecom operators
across the world. In essence, they mastered the art of designing and building
complex wireless systems consisting of infrastructure as well as mobile phones
and integrating the systems into the operators already existing ‘legacy’ circuit
switched voice-systems. With the introduction of NTT’s wireless network, also
Japanese competitors entered the wireless systems business.
Figure 2: Figure: Incumbent OEM in the late 1990s (by revenues and business model)
and new entrants (by value chain segments)
A second category of firms entered the wireless industry with the increasing
importance of data services and package switching from the late 1990s and
27
onwards as the community of incumbents prepared the way forward towards 3G
systems. ‘Red hot’ new economy companies, like Cisco, Juniper; Ciena, Redback
and Tellabs, responded to the new opportunity by entering the wireless core
network market with their powerful IP router technologies. Among the entrants,
particularly Cisco were successfully responding the operator’s demand for large-
scale core- and edge network routers. At the Millennium, Cisco’s line of service
provider routers (i.e. Series 7500 and Series 12000 introduced in 1995 and 1996)
captured no less than 50% of that market. Other IT actors, like HP, Accenture
and IBM, were making inroads into the telecom operator market. Business Week
(Nov 4, 2002):
“The situation facing telecom today is eerily like that which confronted
the info-tech business a decade ago. Proprietary products are being
superseded by cheaper open systems built from off-the-shelf parts.
Vertically integrated giants such as Ericsson, Lucent, and Nortel
Networks are being undercut by newcomers such as Cisco
Systems…just as IBM and Digital Equipment were battered by low-
cost PCs from Dell Computer.”
Being strengthened by its staggering success in network routers, Cisco pushed
boldly into new markets and was believed to be the future ‘king of the hill’ in the
competition for the operator’s infrastructure investments. Nowhere was Cisco's
swagger about its disruptive capabilities more apparent than in the company's
unflinching attempt move into the telecommunications-equipment market, and
thus into the market domain which was controlled by powerhouses as Nortel,
Lucent, Siemens, Alcatel, and Ericsson. After her interview with John Chambers,
Cisco’s [former] CEO, on Cisco’s attempt at disrupting the telecom equipment
vendors, journalist Stephanie N. Mehta writing for Fortune, the business journal,
offered the following thoughts:
“With his patient speaking style and West Virginia drawl, he made
Internet Protocol, or IP, seem somehow less intimidating. When he
called rival telecom-gear makers ‘old world’ companies, his tone was
28
never mean-spirited. Rather, it was almost as if he felt sorry for them”
(Fortune, May 14, 2001)
In Asia, China’s domestic telecom market grew very fast during the 1990s.
Among the Chinese vendors serving the developing Chinese market, Huawei
transformed itself from being a distributor of PBX-switches (private office
telecom switches) into a highly capable provider of digital fixed line switches.
Drawing on an alliance with Bell Shanghai, the former distributer designed its
own digital switch (C&C08), which no Chinese competitor could rival in terms of
price and performance. Huawei owed its success to the ability to integrate
externally sourced know-how with its massive internal R&D-investments. With
the same speed and precision Huawei absorbed GSM radio base station
technologies, which was followed by the company’s own full-line offering of
wireless system products. Due to its unique grip on Chinas systems, Huawei’s
engineers were in an advantageous position when it came to develop and
implement wireless ‘added value’ components (e.g. pre-paid and text messaging)
in the Chinese telecom infrastructure. With original design of innovative low-cost
line of GSM products, Huawei began hence to have impact also outside China in
the late 1990s.
Before these questions would find their answers, the communications
industry went from boom to bust in the Internet Crises that begun as a reaction
in the US stock market when the high level of financial leverage proved
unsustainable. Stock prices like stone to the bottom of the ocean with the same as
velocity as Internet companies went bankrupt. For the equipment vendors, the
real issue was whether or not this was the beginning of a new industry trajectory;
was this the moment in the history when century-old industry incumbents would
finally be pushed aside by radical innovators, like Cisco?
All vendors faced a sharp decline in orders for telecom equipment, causing
companies to downsize dramatically in order to avoid going bankrupt. Ericsson
saw no other way than radically reducing employees from around 120.000 people
to just below 50.000 through three consecutive cost-cutting programs. Lucent and
Nortel slashed jobs and divested assets even more brutally, leaving to companies
with just around 25% of the workforce employed at the peak in year 2000.
29
Diagram 7: Major Incumbent’s Revenues and Net Income 1095-2006
Source: Lazonick and March, 2011
The outcome of the crises was complex. Both Germany’s Siemens and Lucent of
the United States found it difficult to restore growth after the demand for
wireless equipment began to recover in 2004. Siemen’s merged with Nokia,
forming NSN in 2006. At the same point in time, the Lucent’s operations were
combined with Alcatel as the two companies were joined together into the second
big merger in the wake of the crises. By then Motorola’s radio base station
business gained little traction with the major operators, making the American
tech giant dependent on its mobile phone arm. Because the Motorola’s big gamble
in satellite mobile systems – Iridium – failed as a business, the once market
leading tech firm began to slide out of the market. Motorola had a brief moment
of success with the Razor, the successful ‘flip phone’. Despite stellar global sales
in 2002-2004, Motorola was not able transform revenues from the world wide
success with Razor into follow-ups. Apple offered Motorola the opportunity to
design a mobile phone around the iTunes service, but Motorola fumbled that
windfall by launching the awkward Motorola Rokr E1. Steve Jobs proudly
30
presented it in September 2005 as “the iTunes phone”, but he also saw its obvious
design flaws. At this point, Jobs broke off from the collaboration with Motorola to
set a new course for Apple together with AT&T, the only GSM operator in the US
market.
Figure 3: Industry Consolidation: the major mergers and acquisitions, 1990-2016
Nortel Networks, another North American tech giant, also crumbled in the first
decade after the Millennium. In 2009, Nortel’s owners agreed to split Nortel in
parts that were sold-off to the highest bidders; Ericsson got the network division
(with its business with leading US operators) and Google got the patent portfolio.
Apart from reshaping the landscape of integrated vendor, the Internet
Crises put an end to the major niche-players attempt to expand into radio-base
stations and thereby threaten the incumbent position of the integrated vendors
through radical disruptive technological innovations.
If the North American incumbent’s ability to compete in the post-crises
markets were limited, European incumbents fared better by comparison. When
the market recovered in winter 2004/2005, Ericsson responded with surprising
ease. After three years of frozen investment programs, the operators needed to
add capacity to the wireless networks, which created the mini-boom in 2005.
Ericsson’s readiness to ship radio base stations helped the Swedish company
restored its pre-crises command of market. In response to Ericsson’s quick build-
up of capacity to meet customer demand in volume markets (GSM) as well as
high-margin products (3G), the remaining competitors tried to counter Ericsson
31
by orchestrating two the major mergers between Alcatel-Lucent and Nokia-
Siemens in a search for volumes. Whereas NSN built a stronger position in
wireless networks markets, Alcatel-Lucent became the less successful of the two
companies. By 2010, the revenues of the French company were down to ca 50% of
the earnings of NSN in the same year.
Figure 4: Incumbent OEM’s business model and entrant challengers by value chain
segments, 2014.
Huawei moved forcefully into the global markets with is low-cost offer. A
CTO of a French optical networks operator was quoted in the Economist: “when
we first saw Huawei’s equipment, we could not believe a Chinese company could
match a Western one – and we were proved wrong” (Economist, Jan 8, 2005).
That was not an isolated observation. In 2009, Huawei rivaled Ericsson’s leading
position in the GSM market (primarily in Asia), and was beginning to win a
strong position in more advanced 3G equipment. Whilst becoming an increasingly
innovative vendor, Huawei still priced its equipment very aggressively, pushing
depressing average margins from levels around 20% to 10%, or even less.
32
Diversification into ‘Managed Services’
In the short run, the Internet Crises forced vendors to take a new stance on costs.
All vendors slashed costs aggressively. Across the leading corporations, more
than 200.000 employees were laid off in a gruesome downsizing process.
Typically, the downsized organizations were down to less than 50% in terms of
employment. Outsourcing and off-shoring hence became a common practice. The
degree of outsourcing increased from the late 1980s and onwards. Ericsson led
the way by forming an alliance with Flextronics, the electronic device
manufacturer, for a large chunk of its manufacturing. By 2002, all incumbents
followed the cue, initiating a process towards outsourcing a substantial part of its
manufacturing operations to EDM-partners. It was however Huawei’s entry
through aggressively priced quality products that face of the wireless equipment
market in a more permanent way. Particularly Huawei’s European competitors
responded by focusing on services, offering ‘managed services’ to operators that
were eager to reduce operational costs (in response to high debt and soaring
capex spending).
Diagram 8: Operator's global CAPEX by type
Source: Dell’Oro, several years.
By the late 90s, the operators spent ca 60% of the capex on wireless
infrastructure equipment (mobility). In the same period, there was a boom for
33
optical networking and Carrier IP due to investments Internet services.
Increasingly, wireless 3G services also required increasing spending on IP and
Ethernet routers. Manages services grew slowly, but the revenues were
concentrated to a few vendors, i.e. Ericsson, Alcatel-Lucent and Nokia. Among
those competitors, Ericsson took the lead with the aim set at getting to 30% share
of the total revenues.
Vodafone and Ericsson were the first put their signatures on agreements
concerning the Britain-based operator’s networks in Italy in 2004. The two
parties shortly thereafter signed as second and much more encompassing
agreement concerning Vodafone’s network in the UK.
Diagram 9: Managed Serices in 2013
Source: Del’Oro (2013)
Thereafter, managed services market expanded quickly. Nokia Siemens
Networks and Alcatel-Lucent followed in Ericsson’s footsteps and benefitted from
a trend where a large number of operators, many of them from developing
regions, outsourced their day-to-day network management and operations in
return for a considerable cost savings. Just as in wireless equipment, the old
34
vendors dominated carrier market in managed services. It was conclusion was
not forgone outcome, as the operators were taking the decisions to outsource
operations of their networks. For the managed services market in general,
excluding telecom, it was the large IT-companies, e.g. IBM, HP and Accenture,
that dominated.
From Managed Services to IoT Verticals
From a certain distance, it would look as the equipment vendors already by, say,
2006 were comfortably in the process of moving away from their original core
business (i.e. network equipment) into the novel area of services and software.
From the end of the crises around 2004, the short-term quest for top-line growth
– revenues – primarily motivated the diversification by Ericsson and its followers
onto the managed services market. Ericsson, for example, developed strategic
plans with two faces, including continued leadership in wireless connectivity
combined with certain areas of targeted growth, particularly relating to services,
IP-networking, TV/Media and support software. The formula was simple enough:
as the cost and price of radio connectivity drops radically, everything that can be
connected into a wireless network will be connected wirelessly. By Ericsson’s
strategists, this was seen the precondition of the Connected Society. By 2010,
Ericsson laid out its approach to service-driven growth more carefully. Ericsson’s
strategists suggested a specific relationship between network equipment sales
and services-based revenues. Equipment provided the basis for the future
services contracts; “…winning large [network equipment] projects are…” the
argument run, “…a necessary first step to secure future software and services
business when upgrades and/or expansions of the networks take place.”
A few years later, the industry’s vision for services matured into a more
coherent understanding of services and software as targeted growth areas of the
equipment vendors. Across the industry, equipment vendors, as well as some
leading operators, began to include novel concepts of cloud computing, smart
cities, M2M, internet-of-things and vertical (industry specific solutions) in an
extended concept of services and software, linking it to a 5th Generation of
wireless services. Among the equipment vendors, Ericsson emerged as a
35
champion of that extended view of services when the company promoted the view
of the connected society (or the 50bn connected devices strategy). There was no
lack of supporters of the notion of a connected society in the making:
Source: IoT Analytics, 2015
Major influential advisory firms began to promote the view of cloud and IoT as
the rising growth opportunity also for the incumbent actors within the world of
wireless telecommunications; cloud and IoT markets was slanted for fast paced
advance: watchers of industrial trends, such as Gartner and McKinsey Global
Institute, began to prophecy of IoT as a major growth pool, expanding at 20-30%
CAGR to reach revenues between three and six trillion USD in 2025. “Who will
…” McKinsey probed “… capture this investment opportunity?”
There have been numerous predictions about the size of the IoT today as
well as in the near future. The most widely cited is that of Ericsson. Prior to
Ericsson’s report, Intel estimated in 2009 that there were already five billion
devices connected to the internet. Even if these high numbers seems high, which
perhaps could be expected, estimated by less biased organizations, such as the
OECD (2012; 2015) are not suggesting that they are widely off the mark. A few
years later, Gartner and other industry advisory groups published more
conservative estimates. Even if less aggressive, these later calculations point
nominate IoT as a critical high-growth opportunity.
36
IoT epitomizes the ‘third wave’ in the development of the Internet. While
the www of the 1990s connected one billion users via PCs, and the mobile
internet of the 2000s connected two billion users via smartphones -- now
approaching six billion), the IoT is projected to connect between 20 and 50 billion
“things” to the internet by 2020, ranging from wearable devices to automobiles,
appliances, and industrial equipment. Just as the Internet, IoT is not a unified
‘technology’. Rather, it is the service [outcome] of a combination of advances
within a number of interrelated technological areas of innovation:
Table 5: Internet-of-Things by Area of Innovation
AREA of
INNOVATION
TECHNOLOGY SERVICE DISTINCTIVE
FEATURES
Sensors and modem
IT System Virtualization Cloud
Connectivity
platforms
Wireless connectivity LPWA, low-latency
TDD/FDD design
M2M Cost, low energy, low
latency; massive
connectivity (50k/cell)
Wireless connectivity Optimized OFDM LTE 5G 1GB bandwidth at
10% of today’s cost
per MB
Analytics -- Big Data
IT and telecom
system control
SDN and NFV Slicing;
Antenna technologies MIMO
Source: Author’s analysis
More or less simultaneous advances in these areas of innovation, as well as the
general diffusion of new business models in scalable cloud services, i.e. pay-as-
you-go, allowed pointed towards ‘use cases’ within IoT. Improved wireless
connectivity technologies allow objects to be controlled remotely across IoT
services. Therefore, wireless equipment vendors, industry associations and
various consultancies and analysts advocate that the transition from 4G to 5G
will be pivotal to the development of IoT.
On the one hand, 5G continues the path set by previous generations of standards
towards low-cost mobile broadband. Compared to the progress between the third
and fourth generations, which took wireless broadband from 10 mbps to 100 or
150 mbps, 5G takes another a huge leap forward towards 1 to 10 gbps
37
throughput. IoT devices are going to have varying capabilities and data demands
and the 5G network needs to support them all. With IoT, users (private or
corporate sector) individuals we are going to see services that only need a tiny
amount of data and a long battery life as well devices that require fast speeds
and reliable connectivity. To work well, a fully realized internet of things
ecosystem must have a 5G network that connects all of these devices and takes
into consideration the use of power, data demand, and spectrum. Therefore, 5G is
not one technology (just supporting higher bandwidth) but a platform bundling
together different wireless connectivity technologies with very different
characteristics. Critically,5G thus involves low-power and low-bandwidth
technologies that improve other dimensions, such as latency and reliability
(uRRLc) or cost, size and power-consumption of connected devices (mMTC).
Figure 5: Internet-of-Things: use cases by type of wireless technologies and business
requirements
Sources: author’s compilation of 5G forecasts and white papers by: GSMA, Ericsson, Huawei
38
Nokia, and Qualcomm.
There is a widespread agreement concerning the impact of IoT on various
settings and industries. Whilst the notion of ‘smart homes’ has attracted
considerable attention since the 1990s, most predictions points to IoT and 5G as
business-to-business solutions. In particular, the ‘usual suspects’ among the
industry analysts points to four sectors, or ‘verticals’, where the impact of IoT will
figure most prominently:
• the automotive industry, e.g. the connected self-driving car,
• the utilities sector, e.g. smart electrical grids,
• high-tech manufacturing, e.g. remote process control and machinery
management
• the logistics and retailing sectors e.g. tracking of objects
• medical services, e.g. telemedicine and patient monitoring
Concerning the revenues from providing IoT-services to the actors within the
different verticals, there is much speculation on how much there is to be gained
from providing IoT services to the different verticals. Estimates of revenues by
industry (vertical) vary a lot, just as the estimates of the number of connected
devices also are varying. For example, estimates for the automotive sector build
on approximations of the impact of IoT on the ‘connected’ and autonomously
driving car. In general, analysts propose that revenues from the sectors that will
experience fast and deep up-take of IoT services (above) will each become 0,5 to 2
billion USD markets for providers of IoT services. The questions, then, become
twofold: who will capture these opportunities and how will they be captured?
In sharp contrast to the value chain of mobile equipment and services,
which is typified by mature market consolidation, the IoT industry is still in the
making. The charting of the actors by the value chain (below) builds on the
author’s scan of company web pages and start-up listings by IEEE
(http://iot.ieee.org/startups.html). It shows how incumbent IT companies with
decades of experience as providers of ITC solutions are flocking around the IoT-
39
opportunity, but there is still, apart from IBM, very little vertical integration.
The wireless operators are holing a particular positon as the providers of licensed
wireless spectrum in the value chain, which is reserved to operators that have
that scare resource.
Figure 6: Major and minor actors by the IoT value chain 2016
Source: company web sites 2015-2016; IEEA 2016
IoT attracts a fair amount of VC funding7 and start-up activity. The listing above
of start-ups only reports a fraction of the +100 new start-ups that entered the
market in 2016. Leading IT research firm Gartner has revealed that it is tracking
some 200+ IoT platforms, Forbes reports (Forbes, Oct 4, 2016). As the major IoT
7 Funding to IoT companies has more than quadrupled over the past five years, with year-
over-year growth in every year except 2013. This past year saw 83 percent growth over 2014’s
funding tally, making 2015 a boom year overall for the IIoT, which has driven a cumulative $7.4
billion in venture investment over the past six years (KPMG 2016; CB Insights 2016)
40
companies try to strengthen their IoT offering horizontally and vertically, they
target the more advanced start-ups. According to a study from Strategy Analytics
(2016), there were almost two dozen major IoT-related M&A during the first
quarter of 2016. Their findings indicated that the most desirable acquisition
targets had developed core competencies around analytics, security, connectivity
platform capabilities and services. Highlighting the state of play, tech giants such
as Cisco, Intel and Microsoft, spent out on acquisitions to enhance their IoT
portfolios. Microsoft acquired Italian-based IoT service Solair, which specializes
in verticals such as hospitality, manufacturing, retail and transportation.
Cypress Semiconductor revealed that it intended to acquire Broadcom’s wireless
IoT business and related assets in a $550m deal. Cisco Systems paid $1.4bn for
Jasper Technologies, the developer of IoT platforms for major operators such as
AT&T. Also notable is the increase in the worth of the companies being acquired.
While vendors are still acquiring companies for $50, $100 and $200 million USD
dollars, billion dollar acquisitions, such as Cisco’s $1.4 billion purchase of Jasper
Technologies, became more common in 2015 and 2016 (Strategy Analytics 2016;
EY 2016).
The Paradoxes of IoT for the Wireless Equipment Vendors
Evidently, the development within the IoT industry presents the wireless
equipment manufacturers with an unpresented opportunity. If the analysts are
correct in their predictions that IoT will be the big next phase in the evolution of
the ITC industries, there will be an increasing demand for wireless connectivity.
Simply put: if IoT takes off at a large scale, the traffic in the wireless networks
will increase and there will be additional demand to up-grade the existing
wireless broadband networks as well as building new narrowband M2M
networks. For the wireless operators and the vendors of wireless equipment,
there are a series of interrelated headaches. The wireless operators, as spectrum
licensees, enjoy the privileged position of having a legally regulated monopoly on
wireless radio transmission. Yet, the competition between wireless operators is
fierce and, as we already have discussed, the commoditization of connectivity is
currently progressing at high pace. So, what does the IoT business case really
41
look like for the operators? The simple truth for operators, it seems, boils down to
a increased focus on providing IoT services, as opposed to providing raw
connectivity to a IoT provider like IBM. Numerous international telecom
operators such as Verizon (via nPhase, a joint venture with Qualcomm),
Telefonica and Deutsche Telekom are starting to position themselves as service
enablers. AT&T provides cellular connections to over a million vehicles including
Tesla, Audi and GM. This year, an analyst predicts that AT&T’s revenue from
the Internet of things will exceed $1 billion, most of which is from connected
cars8. First, operators have built ‘core competence’ to run and manage
applications over the network with differentiated quality-of-service levels.
Therefore, wireless operators, like AT&T, have successfully implemented IoT
platforms, supporting IoT-services to industrial users in various segments. In
this way, AT&T is moving beyond just selling consumers and business
connectivity access. It is now pushing into consulting services and integrating
technology by dedicating vast resources to the growing field of software and
services, offering industry specific cloud-based solutions and pre-packaged
vertical software for transportation and logistics services, connected cars,
insurance, medical services, etc.
The IoT scenario for wireless operators trickles down to the wireless
equipment vendors. Just remaining in the position a provider of wireless
equipment will hardly make for good strategy for the same reasons as drives the
wireless operators to make the strategic move towards software and services.
Summary
Concerning technological innovations, the evolution of wireless services has been
characterized by three phases: voice calls, wireless broadband connectivity
enabled the smartphone and internet and the emerging M2M-scenario with
applications such as smart cities and self-driving cars. The business cycle was
shaped by a business boom in the era of voice (1990s), which came to an abrupt
halt with the Internet Crisis (2001-2003). Recovery began in the late 2003 and
8 http://www.zdnet.com/article/connected-cars-expected-to-be-a-1b-business-for-at-t-in-2015/
42
continued with sustained growth for almost a decade by the smartphone
revolution.
Table 6: General trends in the wireless industry from late 1990s to 2016: technologies,
services, standards, markets and the intensiveness of competition :
Late 1990s 2001-2003 2004-2014 2014-
Technology 2G Narrow-band.
First steps of
radical innovation
in 3G broadband
tech
3G transition to
broadband
Incremental path
to 3G+ and 4G
broadband
Transition to 5G
and the IoT
scenario
Service Voice w sms Voice, photo,
music, limited
internet.
Smartphone with
full internet, app
markets. Vendors
also diversify into
managed services
M2M/IoT aims at
the growth of 5G in
B2B (verticals)
Standards Regionalization of
standards in EU,
US and Asia.
Intense inter-
standard
competition
between EU, US
and China
Trend towards
convergence on
LTE ‘family of
standards’
LTE dominates;
wireless now only a
part of a much
larger eco-system
of industry
standards (e.g
cloud standards)
Markets
Regionalized Regionalized Trends to
globalization
Emergence of
regional vertical
B2B markets?
Intra-
standards
competition
Rapid growth and
strong profitability.
High margins and
weak competition
within the regional
standards.
From boom to bust Recovery and
growth, but weaker
profitability due to
intense competition
Fierce competition
with commoditiza-
tion of connectivity,
or return to profi-
table growth?
Wireless vendors
need to compete
with IT-companies
in IoT
In the 1990s, there was a trend to regionalization as Europe supported GSM and
it’s broadband off-springs (i.e. UMTS, HSPA, LTE). US and South Korean actors
pushed the San Diego-based Qualcomm’s CDMA-technologies as the basis for
wireless broadband. The battle was not only for the domestic/regional markets
but, in particular, for the growing Asian markets. China entered the standards
competition through establishing an initiative around it’s TD-SCDMA-standard.
By the end of the first decade of the new Millennium, China as well as Qualcomm
gradually began to align with the LTE-initiative, contributing to a trend towards
43
technological globalization. Whilst, competition between standards decreased, the
competition between the vendors within the LTE “family of standards” increased.
Even if the demand for wireless equipment and capacity grew with the
smartphone revolution, the competition became vendors became intense, with
Huawei’s entry and considerable concentration of capital through horizontal and
vertical mergers. By 2015, there were many voices echoing the view that
commoditization, thin margins and relentless competition shaped the vendor
industry. At that point, the novel sequence of radical innovation linked to 5G,
cloud and IoT —many argued— would re-install the foundations for to high-
margin growth once again. The question was, of course, if wireless equipment
vendors were in position to compete for the high-margin parts of the IoT-
business?
44
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